WSJ: "Mall Glut to Clog Market"

Wed, 2008-09-10 13:22

The Wall Street Journal is taking a rather negative view of the retail real estate development pipeline. The data they are citing comes from Property & Portfolio Research Inc., perhaps the most bearish of the major real estate data providers. Data from Reis Inc., in contrast, shows that the pace of construction did not match the peak of the 1980s. Also worth nothing, deliveries as a percent of existing inventory also are not out of line with historic numbers.

Here are some charts we ran in our May issue illustrating the discrepancies.

Developers have built one billion square feet of retail space in the 54 largest U.S. markets since the start of 2000, 25% more than what they built during the same period of the 1990s, according to Property & Portfolio Research Inc. of Boston. U.S. retail space now amounts to 38 square feet for every person in those 54 markets, up from 29 square feet in 1983, the firm says.

Consider a six-mile stretch of highway north of Dallas, where three developers are racing to finish four huge shopping centers with a combined three million square feet of space. Not only will they compete with each other, but there are three existing malls within a 10-mile radius.

"There just aren't enough tenants to go around for three projects," concedes Gar Herring, president of shopping center developer MGHerring Group of Dallas, which is building the largest of the centers.

Realpoint, a credit rating agency in Horsham, Pa., has tracked 127 mall loans that are delinquent or in default, including a $22.2 million mortgage on Midway Mall in the Dallas suburb of Sherman, Tex. Like many older malls, Midway, which is managed by Simon Property Group, the largest operator in the country, was unable to withstand competition from a nearby new open-air center, Sherman Town Center, and is nearly half vacant.

In the face of a prolonged housing crisis, the decline in consumer spending, and the lack of construction financing, developers have been forced to abandon, postpone or scale back projects.

Don Chapman, a managing director at Ariel Preferred Retail Group of Williamsburg, Va., which owns seven outlet centers across the country, began lining up tenants a year ago for a $90 million outlet center he plans to build in Rockford, Ill., but is finding that lenders are insisting on onerous terms, including more equity as well as personal guarantees from the developer. “Our thinking was that we would be in the ground by now,” said Mr. Chapman, who plans to continue seeking tenants. “It's taking longer than we anticipated.”

Brian M. Smith, the chief investment officer for Regency Centers, a national strip mall developer and operator based in Jacksonville, Fla., said the company revised its development strategy in the spring of 2007. “We saw it coming,” Mr. Smith said. “We dropped $400 million worth of projects and totally revamped our pipeline.”